Cite as: Keith M. Lundin, Lundin On Chapter 13, § 141.3, at ¶ ____, LundinOnChapter13.com (last visited __________).
11 U.S.C. § 1307(c) permits conversion or dismissal, “whichever is in the best interests of creditors and the estate,” for 10 listed causes, including prejudicial delay by the debtor, failure to timely file a plan, failure to commence making payments under § 1326, denial of confirmation of a plan and material default by the debtor under a confirmed plan.1 Often a creditor’s motion under § 1307(c) requests alternative relief, conversion or dismissal and the inquiry then requires two steps: is cause present, and if so, is conversion or dismissal the preferable remedy? The laundry list in § 1307(c) is not exclusive—cause for conversion has been found for reasons in addition to those listed in § 1307(c).
It has been held that it is appropriate to convert a Chapter 13 case to Chapter 7 when the debtor does not have regular or stable income within the meaning of §§ 109(e) and 101(30).2 “Bad faith” by a debtor can be cause for conversion to Chapter 7.3 Consistent with § 1307(c)(3), failure to timely file a plan is cause for conversion.4 Failure to disclose and inaccuracies in the schedules and statement are strong evidence in support of conversion to Chapter 7.5 Conversion is the remedy of choice when the debtor is playing fast and loose with the Chapter 13 court.6 It is cause for conversion when the debtor exceeds the debt limitations in § 109(e)7 and when the debtor fails to commence making timely payments required by the plan.8 It has been held that a business debtor’s failure to file the reports required by § 1304(c) is not by itself cause for conversion.9 Delay of one year between the denial of confirmation of the debtor’s first plan and the filing of a substantially similar amended plan was unreasonable and prejudicial to creditors under § 1307(c)(1).10
The debtor’s best defense to a motion for conversion is an innocent explanation for the alleged misdeed. For example, in In re Faaland,11 the debtor missed two monthly payments, but conversion was avoided by evidence that bad weather “caused the cause” by temporarily reducing the debtor’s income.
Determining whether a creditor should request conversion or dismissal can be complicated. Bankruptcy courts consider the preferences expressed by creditors in making the decision whether to convert or dismiss under § 1307(c).12 Secured claim holders usually believe they are better off with dismissal—the stay expires, and the creditor can foreclose its collateral. Often, however, conversion to Chapter 7 has the same result with the extra benefit of a continuing bankruptcy case tying up the debtor. After conversion to Chapter 7, if there is no equity in its collateral, a creditor can demand prompt abandonment that will trigger termination of the stay.13 If the creditor seeks dismissal and the debtor is eligible to refile,14 dismissal of the Chapter 13 case may just mean further delay as the creditor deals with a new stay in a new bankruptcy case. Conversion to Chapter 7 rather than dismissal will be preferred when the debtor has committed fraudulent conveyances or made preferential payments that a Chapter 7 trustee could recover.15
The Bankruptcy Reform Act of 1994 impacts whether creditors prefer conversion or dismissal of a failed Chapter 13 case. As amended in 1994, when conversion is in good faith, § 348(f) provides that “valuations of property and of allowed secured claims” determined in a Chapter 13 case before conversion “shall apply in the converted case, with allowed secured claims reduced to the extent that they have been paid in accordance with the Chapter 13 plan.”16 At conversion, a secured claim holder typically prefers not to be bound by the valuation of its collateral and would not want to be limited to the balance remaining on its allowed secured claim reduced by payments under the Chapter 13 plan. In most failed Chapter 13 cases filed after October 22, 1994, secured claim holders will be better off seeking dismissal rather than conversion.
Unsecured claim holders are sometimes better off with dismissal, but not always. Most Chapter 13 cases would be no-asset Chapter 7 cases. In a no-asset Chapter 7 case, unsecured claim holders will receive no payment, and most will be discharged. If the debtor is not performing in the Chapter 13 case, unsecured claim holders will be better off outside bankruptcy if they can pursue the debtor personally.17 If there are assets to be administered, conversion will usually be the better bet for the general creditor. The possibility of exposure for preferences or other avoidable transfers could change the calculus. That conversion to Chapter 7 would preserve the avoidance of a preferential judgment lien was cited by one court in support of conversion rather than dismissal of a Chapter 13 case.18
Chapter 13 trustees usually consider dismissal as the appropriate remedy for a nonperforming case. If the trustee is aware of assets or is fearful of misconduct by the debtor outside bankruptcy, conversion would be in the interests of creditors.
If the Chapter 13 case has been previously converted from Chapter 7 to Chapter 13, conversion back to Chapter 7 rather than dismissal is appropriate for cause under § 1307(c).19 Otherwise a Chapter 7 debtor who is not free to voluntarily dismiss the Chapter 7 case could convert to Chapter 13 and then engineer the dismissal of the Chapter 13 case.20
1 See also § 41.1 Duty to File Statements and Schedules, § 42.2 Consequences of Failure to File Required Information, Including “Automatic Dismissal”, § 53.14 Seek Conversion or Dismissal and § 141.2 Conversion on Request of Creditor or Trustee for discussion of cause for conversion or dismissal when the debtor fails to file the documents required by 11 U.S.C. § 521(1) and, incongruously, by 11 U.S.C. § 521(2). See also § 141.2 Conversion on Request of Creditor or Trustee for discussion of causes for conversion added by BAPCPA.
2 In re Sassower, 76 B.R. 957 (Bankr. S.D.N.Y. 1987). Accord In re Schauer, No. 99-31918, 2000 WL 33792712, at *6–*7 (Bankr. D.N.D. Aug. 14, 2000) (unpublished) (“Schauer has no means of funding the monthly payments required by the plan. . . . Without regular income, Schauer does not satisfy the eligibility requirements of 11 U.S.C. § 109(e), and his apparent ineligibility may very well constitute additional cause for dismissal or conversion pursuant to 11 U.S.C. § 1307(c).”).
3 See Molitor v. Eidson (In re Molitor), 76 F.3d 218 (8th Cir. 1996) (“Bad faith” can be cause for conversion or dismissal under § 1307(c). Debtor’s third Chapter 13 petition filed to retain possession of a home purchased under a defaulted contract for deed was filed in bad faith and appropriately converted to Chapter 7.); Cabral v. Shamban (In re Cabral), 285 B.R. 563, 572 (B.A.P. 1st Cir. 2002) (“Although lack of good faith is not specifically enumerated as ‘cause,’ it is well established that lack of good faith (or bad faith) is ‘cause’ for dismissal or conversion of a Chapter 13 case under § 1307(c).”); In re Schauer, No. 99-31918, 2000 WL 33792712, at *4–*5 (Bankr. D.N.D. Aug. 14, 2000) (unpublished) (“[‘C]ause’ for dismissal or conversion exists within the meaning of 11 U.S.C. § 1307(c) if a debtor converts his or her case from chapter 7 to chapter 13 in bad faith. . . . [A] pattern of deception and concealment that began several years ago and did not end with the filing of his bankruptcy petition . . . is the essence of bad faith.”); Ladika v. IRS (In re Ladika), 215 B.R. 720 (B.A.P. 8th Cir. 1998) (Cause for conversion that tax protestor’s Chapter 13 case was filed in bad faith as part of a scheme to avoid paying the IRS.); In re Baber, 57 B.R. 597 (Bankr. W.D. Va. 1986).
4 In re Rementer, 58 B.R. 723 (Bankr. D. Del. 1986).
5 See Cabral v. Shamban (In re Cabral), 285 B.R. 563 (B.A.P. 1st Cir. 2002) (Reconversion to Chapter 7 is justified when debtor failed to honestly value prepetition lawsuit in schedules, debtor gave misleading testimony at § 341 meeting about value of lawsuit and debtor filed amended schedules reflecting substantial differences from original schedules without adequate explanation.); In re Wright, 300 B.R. 453, 470 (Bankr. N.D. Ill. 2003) (Arguably in dicta, “[a]n intentional failure to schedule a creditor or to list his proper address would most likely constitute ‘cause’” for conversion to Chapter 7.); In re Henson, 289 B.R. 741, 750 (Bankr. N.D. Cal. 2003) (In an amazing chronicle of a Chapter 13 debtor’s five-year battle with the Church of Scientology, cause for conversion that the “Debtor has caused and continues to cause unreasonable and prejudicial delay. . . . Debtor’s Schedules have been shown to be so unreliable that it cannot be ascertained with any reasonable certainty what his financial condition was on the date of bankruptcy five years ago.”); Sladek v. Zeman (In re Sladek), 269 B.R. 229 (D. Colo. 2001) (Cause for reconversion to Chapter 7 that debtors converted to Chapter 13 after discharge in the original Chapter 7 case, there were significant errors and omissions in the schedules, the debtors failed to timely prosecute the Chapter 13 case and the debtors resisted efforts by the Chapter 7 and Chapter 13 trustees to administer the estate.); Toles v. Powers (In re Toles), No. 3:99 CV-1517-G, 1999 WL 1261453 (N.D. Tex. Dec. 28, 1999) (Cause for sua sponte conversion that debtor scheduled assets without values, failed to value assets when directed by the bankruptcy court and proposed 0% plan was unconfirmable.); In re Johnson, 228 B.R. 663 (Bankr. N.D. Ill. 1999) (Cause for conversion of debtor’s third Chapter 13 case that debtor failed to disclose settlements exceeding $1 million of a workers’ compensation lawsuit and a personal injury action.).
6 See, e.g., Toles v. Powers (In re Toles), No. 3:99-CV-1517-G, 1999 WL 1261453 (N.D. Tex. Dec. 28, 1999) (Cause for sua sponte conversion that debtor scheduled assets without values, debtor failed to value those assets when directed to do so by the bankruptcy court and proposed 0% plan was unconfirmable because assets if truly valued would require the debtor to pay more to satisfy § 1325(a)(4).); In re Lewis, 227 B.R. 886 (Bankr. W.D. Ark. 1998) (Cause for conversion that debtor filed Chapter 13 case solely to defeat domestic relations orders, converted money belonging to his former spouse, attempted to evict his former wife and child from the marital residence, precipitated a foreclosure proceeding, falsely claimed that he did not owe support, committed perjury on tax returns and was simply not an honest debtor.); In re Gaudet, 61 B.R. 349 (Bankr. D.R.I. 1986) (Cause exists for conversion and for denial of debtor’s motion to dismiss where debtor filed Chapter 13 to stop a foreclosure but never proposed a plan, never made any payments and intended to dismiss once arrangements for a private sale were complete.).
7 In re Bobroff, 32 B.R. 933 (Bankr. E.D. Pa. 1983). Accord In re Snell, 227 B.R. 127 (Bankr. S.D. Ohio 1998) (Cause for conversion that the debtor is ineligible for Chapter 13.); In re Toronto, 165 B.R. 746 (Bankr. D. Conn. 1994) (Ineligibility for Chapter 13 relief is cause for conversion to Chapter 7.). See § 6.1 [ Consequences of Ineligibility: Jurisdiction and the Automatic Stay ] § 9.5 Consequences of Ineligibility: Jurisdiction; Automatic Stay; Strike, Dismiss or Excuse?.
8 Blaise v. Wolinsky (In re Blaise), 219 B.R. 946 (B.A.P. 2d Cir. 1998); Carson v. First Fed. Sav. & Loan Ass’n, 32 B.R. 733 (W.D. Pa. 1983).
9 In re Kelsey, 6 B.R. 114 (Bankr. S.D. Tex. 1980).
10 In re Lindsey, 183 B.R. 624, 629 (Bankr. D. Idaho 1995) (It was cause for conversion to Chapter 7 that debtor delayed one year between denial of confirmation of first plan and filing of substantially similar amended plan. Both original and amended plans called for payment of $125 per month and $450,000 to be paid from the sale of property. “A one year delay in filing an amended plan which is substantially the same as the first plan is unreasonable. Because the debtor’s payments are insufficient to service the interest and property taxes accruing on her assets, the delay is prejudicial to her creditors. . . . Additionally, the case should probably have been dismissed or converted for failure to meet the eligibility requirements of Code section 109(e). . . . On the date the petition was filed the debtor owed over $390,000 in noncontingent unsecured [sic] debt. It is in the best interests of the creditors to convert the case to Chapter 7 rather than dismiss it. There is substantial property in the estate which, if liquidated by a Chapter 7 trustee, would yield substantial proceeds for distribution to secured and unsecured creditors. Further, the funds received from the previous sale of property should inure to the benefit of creditors.”). Accord Blaise v. Wolinsky (In re Blaise), 219 B.R. 946 (B.A.P. 2d Cir. 1998) (Cause for conversion that there had been unreasonable delay during the 11 months that the Chapter 13 case had been pending, the debtor’s plan was “fraught with problems,” the debtor had not made any payments pursuant to § 1326, creditors had not been adequately protected, the debtor had failed to disclose the ownership of some assets, the debtor had sold estate property without court approval and creditors had filed affidavits requesting conversion rather than dismissal.).
11 37 B.R. 407 (Bankr. D.N.D. 1984).
12 See, e.g., Blaise v. Wolinsky (In re Blaise), 219 B.R. 946 (B.A.P. 2d Cir. 1998) (One of the factors favoring conversion cited by the court was affidavits filed by creditors requesting conversion rather than dismissal.).
13 See 11 U.S.C. §§ 554(b), 362(c).
14 See 11 U.S.C. § 109(g), discussed beginning at § 25.1 180-Day Bar to Eligibility in 11 U.S.C. § 109(g)—In General.
15 See, e.g., In re Snell, 227 B.R. 127, 130 (Bankr. S.D. Ohio 1998) (Having determined that the debtor is ineligible for Chapter 13 relief because of excessive unsecured debt, it is appropriate to convert to Chapter 7 rather than to Chapter 11 because the debtor admits that he has purposefully and elaborately set about to put his assets beyond the reach of a creditor to whom the debtor does not believe he is justly indebted and “[t]his debtor is not capable of fairly avoiding fraudulent transactions he planned.”).
16 11 U.S.C. § 348(f)(B), as amended by Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, § 311, 108 Stat. 4106 (1994). See § 143.2 In Cases Filed after October 22, 1994, § 145.2 In Cases Filed after October 22, 1994 and § 145.3 Lienholders’ Rights at Conversion under § 348(f) after BAPCPA.
17 See § 336.1 [ Strategic Considerations ] § 152.6 Strategic Considerations.
18 In re Toronto, 165 B.R. 746 (Bankr. D. Conn. 1994). See also In re Snell, 227 B.R. 129 (Bankr. S.D. Ohio 1998) (That debtor committed prepetition fraudulent transactions and put assets beyond the reach of creditors is one reason to convert Chapter 13 case to Chapter 7 rather than to Chapter 11.).
19 See In re Sassower, 76 B.R. 957 (Bankr. S.D.N.Y. 1987); In re Rementer, 58 B.R. 723 (Bankr. D. Del. 1986); In re Baber, 57 B.R. 597 (Bankr. W.D. Va. 1986).
20 See also § 150.1 Reconversion from Chapter 7 or Chapter 11 to Chapter 13 (reconversion from Chapter 7 or Chapter 11 to Chapter 13) and § 150.2 Reconversion to Chapter 13 after BAPCPA.